Making continuous money by trading foreign currencies requires that you apply effective strategies. You cannot rely on mere luck if you want to have continuous success. It is important that you know and practice the different forex trading strategies, and even develop one of your own.
Fundamental Analysis
Of course, when it comes to any form of investment or business, fundamental analysis is always on the list. Fundamental analysis deals with the fundamentals. When it comes to trading currencies, you have to consider the economic fundamentals of the country where a currency comes from. You will have to consider the following, among others:
- Economic data reports
- Monetary policy
- Prevailing interest rates
- International trade flows and investment flows
The more that you understand the fundamentals of the different currencies, the easier it will be for you to identify the best currencies to trade for profit. Fundamental analysis is usually a broad form of study into the different currencies. Although it takes lots of work, it is also effective. Many traders combine this strategy with other strategies.
Technical Analysis
If you like analyzing trends, then this is the one for you. By using certain tools or analyzing graphs that demonstrate the movements of the prices of the currencies in the market, you may be able to read and predict their future behavior. Hence, you can be able to identify profitable currency pairs to trade. Take note, however, that trends or patterns come and go. A common mistake committed by traders is to see a pattern even when none actually exists.
When you look at charts or graphs that show how certain currencies fluctuate in the market, it is important that you remain objective. If you do spot a pattern, be sure to observe proper timing. It is not uncommon to find traders who buy in some currency pairs when it is already too late. Also, relying on mere trends may not be the best option. Try to learn as much as possible about the currencies being traded, so that you can have a better understanding of the forex market.
Read More: Forex Trading Mistakes And Blunders to Avoid
Speculating
Speculating is one of the most common strategies in the forex market. Take note that people refer to it as speculating but it does not mean guessing. Again, if you want to be truly successful in trading currencies, you cannot rely on mere guesswork. You need to be objective and adapt a reliable strategy.
When you speculate, you place a wager on whether the price of a currency will be higher or lower in the future. Since you will be trading currency pairs, you predict if the price of a currency will be higher or lower than the other currency in a pair. To be successful, you need to be familiar with the characteristics of the currencies that you are dealing with. Hence, you need to research and analyze certain information about them. You can also compare them with other currencies. By doing so, you will be able to identify profitable currency pairs to invest in and trade.
Hedging
When a company sells its good to other countries, it is usually paid in the same currency where the sale is made. Hence, if a sale takes place in the U.S., then the payment will be in USD even if the company is a European company. However, there is also the possibility for fluctuations to occur, which can cause the sale to be valued in the home country. To avoid losses arising from the fluctuations, a company can hedge itself by trading currencies. By doing so, adverse currency movements can be minimized, which can lower any losses and maximize company revenue.
Carry Trade
In a carry trade, you sell a currency that has a low interest rate. You then apply the proceeds to a currency that has a high rate of interest. As long as the difference between the two currencies is stable, then there is an opportunity for you to make a profit. This is a good strategy if you are well funded since there is only a small percentage of profit. However, if you are working on a budget, then this may not be a good option. Also, in case of high volatility in the market, then this strategy may be risky to use. For this strategy to work, it is important that there is a substantial difference between the interest rates of the currencies in a pair.
Averaging Down
This strategy will allow you to buy a currency pair at a bargain price each time you make a buy order. The key to profit is when the value of the pair, specifically the base currency, increases either back to its original amount or higher. So how does this work? First, you buy a currency whose value you think will increase in the future. Let us say that the price of a unit of the currency is USD 1.200. If the price falls down to $1.100, you again make a buy order. If the value again drops say to $1.030, you buy it again, and so on and so forth.
So, how do you profit? The key to profit is when the price increases either back to its price when you first started the strategy or higher. Of course, this depends on the circumstances. You should also consider the fees that you may have to pay to your broker.
The key to this strategy is to choose a currency that will most likely increase. Although this strategy seems very practical and effective, this is actually considered an aggressive approach. Therefore, you should be careful when you apply this strategy. The danger with using this strategy is when the price of the currency that you invest in does not increase or only get a small increase. On a positive outcome, there is a chance that you can earn a big amount of profit. However, if you end up with a negative outcome, then the losses can also be substantial. Therefore, use this strategy with caution.
Buy and Hold
This seems to be the most basic strategy for forex. As the name implies, you simply have to buy a currency and hope that its price increases in the future more than the amount that you acquired it. The important part of this strategy is to be able to identify which currency to invest in. To increase your chances of success, you need to research and analyze the different currencies and compare them with one another. Also, consider the different factors that affect the forex market and see how they can affect your chosen currency or currency pair.
Copy Trade
Some trading platforms will allow you to automatically copy the trades of other traders. Usually, how this works is simply to look for a trader who has an impressive win-rate ratio. And, with just a few clicks of a mouse, you can follow and copy his trades. This is not really a recommended approach. But, if you choose to use this strategy, the only way to increase your chances is to make sure that you pick and follow someone who knows what he is doing. Also, pay attention to his win-rate ratio and to his winning and losing frequency.
Before you even follow or copy anyone, be sure to observe him several times to properly gauge his ability to make profitable trades. Sometimes you may be able to find a good pattern or timing when to follow a certain trader. It is worth noting, however, that copying other people’s trades is only an approach for beginners. If you are serious about making money in the forex market, you need to learn to trade on your own without relying on anyone. You need to develop your own reliable strategy.
